Grudging Public Support for Euro Could Hold It Together

The euro survived the financial crisis and a lost decade for the European economy. Now its test is political, and it is likely to survive it -- battered as ever and still getting the blame for Europe's problems.

In Europe's year of election contests between the political establishment and its enemies, the euro is a target for populist insurgents and some mainstream figures. The common currency is variously getting blamed for unemployment, industrial decline, loss of national identity and German hegemony.

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France's far-right leader Marine Le Pen, who faces centrist candidate Emmanuel Macron in the final round of the presidential election on May 7, wants a referendum on leaving the euro. So does Italy's antiestablishment 5 Star Movement, which could win power in elections due by mid-2018.

Mr. Macron, whom opinion polls favor to win next Sunday, supports the euro but says it needs a major overhaul. He argues the currency union is skewed toward German interests -- a common view outside Germany -- and says the euro's 19 countries need a common budget to finance growth-friendly investments and recovery in struggling members. That's anathema to Berlin.

The euro was meant to bind European countries together, economically and politically, while boosting investment, productivity and growth. Instead, it has coincided with crises and exposed underlying weaknesses in many countries.

However, today's political attacks on the euro are unlikely break it up. Although Europeans love to criticize the euro, they mostly don't want to leave it. Opinion polls have consistently shown low support for returning to the franc, the peseta or the drachma. Only in Italy is support for the euro more tepid, although it's still more popular than exit.

In Southern Europe, the former national currencies are still associated with the bad old days of inflation and repeated devaluations. In Northern Europe, economies haven't performed all that badly under the euro. Across the continent, the crisis years taught most voters and politicians that breaking up the euro would bring massive financial turmoil. The middle class isn't willing to risk savings held in euro-denominated assets. Even many people who think joining the euro was a mistake say the costs of leaving it are too high.

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With Europe's economic recovery now finally improving after years of sluggish growth, the argument that countries can't grow under the euro is weakening. Many economists believe the eurozone's growth could be close to 2% this year, a fast pace by recent standards.

The euro remains far what from what economists call an optimum currency area. Ideally, a currency should cover an economic zone where labor and capital move fluidly, where common taxes and public spending help weaker regions to keep up, and where the financial system has common supervision and a backstop in times of crisis.

The eurozone still lacks many of these features, even though it has strengthened its crisis-fighting tools. "The eurozone remains incomplete, and there will come a day when it faces a crisis to which the only answer is fiscal union," says Nicolas Veron, a French economist and fellow at the Peterson Institute for International Economics in Washington.

Being far from optimal meant that the eurozone took longer than other major economies to recover from the financial crisis. For instance, because some countries couldn't adjust through independent currency devaluation, labor costs adjusted through painful wage deflation instead. But recovery is now under way in most of the bloc.

Greece is one exception. Its economy remains stuck in depression. A bigger question mark is Italy, the eurozone's third-biggest economy. Stubborn economic stagnation has undermined public support for established parties and drawn voters toward populists who question the euro.

But the contrast between Italy's failure to grow and Spain's accelerating recovery strongly suggests the fault lies at the national level, not with the common currency. Spain's economy grew by over 3% last year, whereas Italy grew less than 1%.

Even members of the 5 Star Movement say leaving the euro wouldn't solve Italy's deep structural problems. The party is internally divided over its own proposal for a referendum. Italy's core growth problem -- stagnant, even declining, productivity -- has been evident since the mid-1990s, before the euro's creation.

There's little evidence that the euro is to blame for France's economic problems, says Daniel Gros, director of the Center for European Policy Studies, a Brussels think tank. The country didn't develop major imbalances, and its exchange rate under the euro was never obviously too high, he says. Many economists say France's growth could improve, given political stability, some reforms and better confidence.

Ms. Le Pen's main objection to the euro is about national sovereignty. But there are three hurdles to her ability to pull France out. She would need a major upset to win the presidency. It would be an equally big surprise if her National Front won control of parliament in June elections, giving her legislative support for a referendum. And nearly three-quarters of French voters oppose leaving the euro, according to surveys.

"The cost of breaking up the euro is so high that this probably won't be the consequence of the challenge from populism," says Christian Odendahl, chief economist at the Centre for European Reform, a London-based think tank. "Rather, the issue is resistance to the broader European project. If populists win power on the basis of anti-euro rhetoric, countries' willingness to work together in Europe will be constrained."